Year End Tax Planning Tips for 2021
December 2, 2021
It’s that time of year again. December 31st is the last day of the calendar year, and the deadline to many important IRS requirements. Here are several year-end tax planning deadlines and planning tips. This article is especially tailored for foreign taxpayers, business owners and entrepreneurs, and higher-net worth individuals and families.
Establish or maintain U.S. residency
If you’re a foreign national and you need to establish residency in the U.S., or keep your status as a resident alien, check to see how many days you’ve been in the United States since January 1st. You might have to rack up some more days present in the United States to obtain or maintain your status as a resident alien. Familiarize yourself with the Green Card Test and Substantial Presence Test requirements. You might not be able to go home for the holidays, if doing so would mean you don’t have enough days in the U.S. this year to meet the Substantial Presence Test.
Establishing residency in the U.S. for tax purposes can be complex. If you’re not sure how to implement them, contact us and make an appointment right away so we can advise you how to proceed, and maintain your tax options.
Establish a small-business retirement plan.
Business owners who want to establish a solo 401(k), SEP or SIMPLE IRA to maximize available deductions for the year should act now to ensure the plans are completely set up by year end. These plans take time to establish. But business owners and even independent contractors can set aside significant amounts of money, pre-tax, using these types of retirement plans.
Contribute to retirement plans.
You have until April 15th of 2022 to make your 2021 IRA contributions. But if you have access to a workplace retirement plan like a 401(k) or SIMPLE IRA, you must make these contributions by December 31st.
If you are age 50 or older, you may be able to make catch-up contributions to retirement plans: Contribute an extra $1,000 to an IRA or Roth IRA, if you’re eligible, or up to an extra $6,500 into a 401(k), 403(b), or for federal employees, the Thrift Savings Program.
Harvest tax losses.
Stocks have had a good year. But if you happen to have some losing positions, you can sell them to offset up to $3,000 of ordinary income for this year. You can also use these realized losses to offset capital gains and reduce your capital gains tax exposure if you have sold investments this year at a profit. Otherwise, you can carry your losses forward to offset up to $3,000 of personal income for the year. You can repeat the profits each year, using this year’s unused capital losses to offset capital gains income and then up to $3,000 in personal income each year until your capital losses are exhausted.
Review your potential AMT exposure
Now’s the time to make an appointment to see if you may be facing alternative minimum tax, or AMT. This may mean some deductions and tax credits are disallowed, including the Foreign Income Tax Credit. It also has ramifications for exercising certain kinds of stock options.
If you are age 72 or older, be sure to take your required minimum distributions from any retirement accounts or annuities by the end of the year. Otherwise, you could find yourself facing a significant tax penalty of up to 50% on any amounts you were required to distribute but didn’t.
If you expect to have RMDs but you don’t need the income, consider doing a QCD (qualified charitable distribution) to your favorite charity. You won’t get to deduct the distribution like you would a personal charitable donation. But you won’t get taxed on the distribution, either. so it’s a wash.
Many tax deductions are subject to a threshold. So, it might make sense to bunch as many of them as possible into the current year. Qualified medical and dental expenses, which are only deductible to the extent they exceed 7.5% of your adjusted gross income, are a common example. If you had some expenses this year, and expect to have more expenses the following year, consider moving next year’s planned expenditures forward to this year. Otherwise, you could leave thousands of dollars on the table for the IRS.
You might try to pay some bills early… or in some cases, delay paying some bills until 2022.
Convert IRA assets to Roths
Future year tax rates could well go up. Consider converting some traditional IRA assets to a Roth IRA, where they can grow tax-free, forever. You will have to pay income taxes on any amounts you convert. But you will protect yourself against future tax rate increases.
Now’s the time to book year-end planning reviews with your tax professional. Many tax planning moves are time sensitive. And CPA calendars fill up fast in the closing weeks of the year.
Pre-pay college tuition
Got college kids? You may be able to lower your 2021 tax bill by pre-paying 2022 undergraduate tuition prior to the end of the year. This may qualify you for the American Opportunity Tax Credit, worth up to $2,500 for each qualifying student. Married couples filing jointly with modified adjusted joint income of up to $160,000 can take the full amount of the credit. From there, the available credit gradually phases out, and goes to zero once your MAGI reaches $180,000.
You don’t have to itemize to be eligible.
If you’re planning on taking courses in a degree or certification program that will advance your current career, you may be able to deduct up to $5,525 in qualifying tuition. Pre-paying tuition this year may help reduce this year’s tax bill. Note that tuition for programs that will qualify you for a new career are not tax deductible. The program must be directly related to your current career.
Donate property to charity
Do you have anything of value you’re not using anymore but you’re probably not going to get around to selling it? Donate the items to charity by year-end. Get a receipt, and you can take a tax deduction on its value. The higher your tax bracket, the more valuable that deduction will be.
Donate appreciated stock
Don’t sell stock before you donate it to a charity. Instead, donate the shares themselves to the charity. This saves you capital gains taxes. Note: Special income apportionment rules apply if you are donating foreign source income to charities in Mexico, Canada, or Israel.
Start a Donor-Advised Fund
Plan to donate money to charity in the future, but want a tax deduction now? Consider starting a donor-advised fund. Essentially, when you start a donor-advised fund, you are starting your own mini charitable foundation. The money in the fund grows tax free. Over time, you will distribute the money to the charity or charities of your choice as you see fit. And you can deduct the full amount of your contribution this year.
Tip: Consider using charitable deductions to mitigate taxes due from a Roth conversion – especially if you planned to make these contributions eventually, anyway. This gets the funds out of your taxable estate, where it could be subject to estate tax over certain limits. It also gives you more control over timing.
AbitOs specializes in the unique accounting needs of high net-worth individuals, entrepreneurs, and business owners with international lifestyles as well as for entities doing business in LATAM and across the globe. Our full-service tax, accounting, and legal team has particular expertise in international taxation. We work every day with foreign business owners and corporations to lower their tax bills, maximize after-tax cash flows, or both.
If you would like to benefit from our expertise in these areas, or if you have further questions on this Alert, we encourage you to contact us.